As the trainee accountant at Zhang, a manufacturer of electrical goods, you are responsible for pulling together the first draft of the consolidated results for the Group. Zhang has acquired shares in Chow, Caves and Kaka in recent years and extracts from the most recent financial statements of all the companies are shown below for the year to 31 December 2019. Income Statements Zhang $m 80 Chow Caves Kaka $m 70 (47) 23 $m $m Revenue 80 60 Cost of sales Gross profit Operating expenses Operating profit Dividend income (26) 54 (30) 50 (30) 30 (18) 12 (19) 35 (14) 9. (20) 30 Profit before tax 44 9. 30 12 (4) 8 (13) 31 Tax (2) (9) 21 Profit for the year Extract from the Statement of Equity Chow Zhang $m Caves Kaka $m $m 39 $m 20 Opening retained earnings Profit for the year Dividends paid Closing retained earnings 66 24 31 21 8 (15) 82 (10) 18 (10) 21 60 Extract from the Statement of Financial Position Zhang $m Chow Caves Kaka $m 20 $m 20 $m 10 Ordinary $1 share capital Retained earnings 50 82 21 60 18 Net Assets 132 41 80 28 NB. There have been no changes to the share capital of any of the companies since the date Zhang acquired their investments. Investments by Zhang Date of Acquisition % of Ordinary Shares Company Investment Book value of the ($m) Net Assets at Date of Acquired Acquisition ($m) $23m $50m $20m $25m $22m $2m 1/1/12 1/1/15 Chow 80% 40% Caves 1/4/17 Kaka 10% For each investment the book value of the net assets acquired closely resembled the fair value except for some land owned by Chow, which had a fair value at the date of acquisition of $16m compared to the $12m shown on the Statement of Financial Position. Inter-company Trading In December 2019, Chow sold $4.2m of dishwashers to Zhang. Chow sells dishwashers on a cost plus 50% mark-up basis. At the year end Zhang had only sold 40% of the washing machines to customers outside the group. Goodwill Impairment After a recent impairment review, the goodwill in Chow is to be reduced to $2.2m. Required Calculate the goodwill that arose on the acquisition of the shares in both 7 marks (a) Chow and Caves. (b) Prepare a consolidated income statement for the Zhang Group for the year 18 marks ended 31 December 2019 (c) Prepare the consolidated extract of retained earnings from the Statement of Equity for the Zhang Group for year ended 31 December 2019 10 marks (d) The Board of Zhang are thinking of investing in a Scottish company called Tartanus next year. Discuss what difficulties they might face integrating Tartanus into the Zhang Group 5 marks

Expert Answer